One of the challenges I frequently encounter talking about financial policy and economic equality is widespread skepticism that the acknowledged scourge of income and wealth inequality has anything to do with monetary and regulatory policy. With the Vatican now weighing in so emphatically on the need for a moral compass in global finance, I’ve clearly got company. The “‘Oeconomicae et pecuniariae quaestiones’. Considerations for an ethical discernment regarding some aspects of the present economic-financial system” is as formidable a document as its title suggests. Could it make a difference? Although some of the details in the Vatican pronouncement are shaky, no one else has said so much so clearly with the authority to which even central bankers pay heed. As a result, the Vatican’s views will at the least be heard and more often turned into action than skepticism and cynicism might suggest.
A few lines from the pronouncement establish its sweeping context (and also its distinctive prose):
The recent financial crisis might have provided the occasion to develop a new economy, more attentive to ethical principles, and a new regulation of financial activities that would neutralise predatory and speculative tendencies and acknowledge the value of the actual economy. Although there have been many positive efforts at various levels which should be recognized and appreciated, there does not seem to be any inclination to rethink the obsolete criteria that continue to govern the world. On the contrary, the response seems at times like a return to the heights of myopic egoism, limited by an inadequate framework that, excluding the common good, also excludes from its horizons the concern to create and spread wealth, and to eliminate the inequality so pronounced today.
Are there specifics with secular traction? One in the Vatican’s call to action is for more social-impact finance in everyday decision-making by individuals and financial institutions. Larry Fink’s letter to the companies in which BlackRock invests is one instance in which the Church may actually be following the industry, as are bank decisions to eschew fossil-fuel or firearms finance. Policy-dictated finance is controversial in the U.S., but less free-market focused global regulators are also hearing the word – the EU is for example looking to mandate, not just promote, sustainable finance even as the FSB and others look for ways to embarrass big banks into being better.
Some of the social-welfare focus in these financial policies comes from companies willing to bet a bit of the bottom line on social-policy goals politically popular in the circles in which their CEOs run, if not necessarily in the red states that speak to many in Washington. Others, though, have come over the years as shareholders – including many within the Catholic Church – pressure the companies in which they invest – sometimes a lot – to hear a higher calling. In just the last round of shareholder meetings, nuns and other clerics were again in evidence on issues such as animal rights, firearms, and the environment. The Vatican clearly has their back on social-impact finance, but now it’s also in front on issues as diverse as credit default swaps, fiduciary duty, incentive compensation, shadow banking, and the very structure of diversified financial companies.
Which of the Vatican’s injunctions is most likely to lead to near-term advocacy and then action? First up are issues that already have strong advocacy communities behind them. For these, the Vatican message’s is validation that gives credence to clamor and thus provides significant momentum.
Example: realigned incentive packages reflecting the higher goals laid out by the Church of paying financial executives for more than short-term return regardless of risk or collateral damage to vulnerable constituencies. Incentive-pay rules have sunk into a deep, deep hole despite Dodd-Frank’s demand for them. Still, inspired by a higher authority, still more awkward questions are certain at shareholder meetings and answers that meet the Pope at least half way are likely.
Fiduciary duty is another Vatican call to action likely to resonate not only with the faithful, but also with the broader advocacy base. The courts aren’t on the industry’s side here, but some large companies have changed their own standards and more could well come to do so regardless of the uncertain pace and dubious impact of the SEC’s recent rulemaking.
Interestingly, the authorities in St. Peter’s Square have not stuck to their traditional confines of social-welfare issues. The statement also touches on current questions never before broached in theological terms. One important example, especially as the Volcker Rule comes up for review, the FDIC is set to review non-traditional charters, and Democrats continue their quest for broader structural reform is the relationship between traditional banking and other financial business lines. The Churches preaches that, “Systemic crisis can be more effectively avoided if there were a clear definition and separation among banking responsibilities for the management of credit, of the ordinary daily management of credit, of investment savings, and of mere business.” “Mere” business means commerce, – even community bankers, vociferously opposed as they are to non-bank banks, have never levelled so devastating an epithet to these charters.
Disagree if you will with the positions on incentive compensation, fiduciary duty, ring-fencing, and much else in the new statement. Still, it includes one observation all too infrequently heard in daily debate on financial policy: “financial activity exhibits its primary vocation of service to the real economy: it is called to create value with morally licit means, and to favor a dispersion of capital for the purpose of producing a principled circulation of wealth.” Many of us could have said that better, but none so well.